When it comes to investments, clients look for positive long-term returns. But many want to achieve more than just profit by investing for impact. We explore impact investing and why it’s important advisers can talk about it in client conversations.
At its core, impact investing is a growing field of investment management where positive environmental or social outcomes are valued as highly as financial returns.
It involves directing capital towards companies that are intentionally developing products and services that contribute to measurable environmental and social outcomes as well as positive financial returns.
Over the past few years, investing sustainably has been a well-documented growing trend. Now, as the world battles both the global pandemic and climate change crises, governments, companies and individuals are realising the critical role of sustainable investments in supporting solutions and healthy economic growth.
A recently-published survey by Boring Money, 'The Great British Sustainable Savers census', supports this. It states that:
Although many advisers have already integrated environmental, social and governance (ESG) factors into their client suitability processes, advisers should be prepared for more clients to ask about investing responsibly and sustainably.
And one approach to investing sustainably is impact investing.
Investment managers who invest for impact look to align their approach with global standards such as the United Nations (UN) Sustainable Development Goals (SDGs). Therefore it’s important to be aware of these when explaining what impact investing is to clients. There are 17 goals in total, adopted by UN member states in 2015 with the aim of protecting the planet and ending poverty by 2030.
According to the UN, around $5-7 trillion is required annually to meet this aim by 2030. However, governments cannot shape public and investment policy in isolation to achieve these goals so they have become a call to capital for investment managers.
Three key themes run through the goals: climate change, social inequalities, and unsustainable production and consumption. As development must balance social, economic and environmental sustainability, the goals are integrated so action in one area will affect outcomes in the other areas.
Investment managers looking to invest for impact identify companies that are adopting strategies to intentionally produce products or services that address the UN goals. They measure the impact these companies have by mapping their output to the key performance indicators that underpin each of the UN goals.
Companies across the globe have a key role to play in developing products that reduce climate change impacts, so investment managers look at companies with business models that help avoid carbon emissions and expand renewable energy capacity. Examples include companies developing batteries for electric vehicles, providing components for solar power generation, or installing grid networks to support renewable energy distribution.
Investment managers could also invest in companies that target areas where there’s a demonstrable gap in services. They ask for evidence that the company is providing affordable products to meet the region’s needs. Or they could consider initiatives that promote energy efficiency or expand access to energy. In these cases, they’ll identify countries with low penetration of sustainable energy products and services.
Another example of an impact process in action is the approach investment managers can take to the food and agriculture industry. They do this to address hunger and nutrition, as well as promote the sustainable use of the world’s resources.
Investment managers can assess how food is produced and the impact of farming practices on the land, water and biodiversity. This involves managing risks around genetic modification, antibiotics and working conditions. It also requires a focus on environmental concerns such as biodiversity and land degradation.
Although the primary driver for advisers to become familiar with investing sustainably is to respond to clients’ evolving needs and preferences, there’s greater regulatory focus in this area.
Later this year, the European Union’s (EU) Sustainable Finance Disclosure Regulation (SFDR) is due to come into force. Although these rules will not now affect advisers in the UK because of the UK’s official exit from the EU on December 31 2020, sustainable finance still matters. The Financial Conduct Authority (FCA) has indicated that if a version of the rules is to be devised for advisers in the UK, it would carry out a consultation in the usual way.
It would be a useful exercise for advisers to spend some time getting to know the range of responsible and sustainable investments available on platform. Impact investing is just one of many approaches clients can choose from. As a starting point, advisers should review their Centralised Investment Proposition (CIP) to consider the funds they have that are appropriate for their clients in terms of sustainability and extending their CIP if required.
Investing responsibly and sustainably matters more than ever in a post-pandemic world. Client awareness is only going to increase and more people will want to tap into potential growth opportunities.
And if advisers are able to confidently understand the different types of responsible investing, including impact, they’ll be keeping both clients and regulators happy.
For more information about the full range and base of sustainable funds and ESG-related models on Standard Life Wrap to meet clients’ preferences. get in touch with your usual Standard Life contact or for more information about responsible investing, take a look at our support guide, Responsible investment – the basics, which covers the approaches used to invest responsibly.
The value of investments can go down as well as up, and could be worth less than originally invest.
The views expressed in this blog should not be regarded as financial advice.